How to earn more 20% interest on deposits - Part 1
The power of DEFI is rapidly coming mainstream, here how you can take advantage
At Smile Group we are huge fans of Decentralized Finance (DEFI) as a way to break down the traditional walled gardens the large banks around the world put up around their customers. I don’t know about you but I generally hated every bank I have ever been with and once you work in finance and you realise just how much money they make off customers for providing such bad service it makes you even more upset.
What is worse about this though is that it’s a regressive tax, hurting the poor more than the rich. Private wealth clients can trade FX at rates close to that of a hedge fund but the rest are left with being forced to pay 1-3% spreads. Deposits earn almost no money, even before the near-zero interest rate environment we are in now but rich clients get access to a slew of different deposit products with attractive interest rates.
DEFI is changing all of this and democratising the business of banking. A DEFI application uses computer code to determine the rules of a transaction. One of the offerings is connecting people who want to borrow money with people that want to lend money. But importantly doing so in a trustless way (where I don’t know the person who is borrowing the money) and safely (where the borrower posts collateral that will be liquidated programmatically if the value of the collateral threatens to fall below the principal that I lent). As a result, we are finding what is the true value of depositing money globally and it is a lot higher than zero
Today there is over $80bln locked in DEFI contracts globally. Whilst this is a lot of money, the average country’s deposits are about 60% of GDP so DEFI deposits are a tiny blip in the system so far.
So how do we take advantage of this new way of banking? So this isn’t too long I will split this post into three parts
Lazy DEFI (CEFI)
DEFI example using Anchor Protocol (where you can earn over 20%)
As a VC how do you value a DEFI protocol
Lazy DEFI (CEFI)
If you are just beginning your crypto journey and you don’t want to (a) take a lot of crypto risk (b) don’t really understand what this DEFI stuff is all about but you would like to earn more money on your deposits then a CEFI (centralized finance) company may be for you. Right now you can earn up to 9% on USD (compared to your local bank of basically zero)
The two companies that I would trust in the CEFI space are Blockfi and Ledn (I have accounts with both). Here are their current interest rates on deposits. Note you can also deposit your crypto and not just USD.
What do these platforms do with my money?
The platforms take deposits and will lend the money out in various ways much like a bank on your behalf. They will enter into overnight lending agreements with trusted counterparties, they will invest it in DEFI protocols etc. Basically, save you the hassle of DEFI and in exchange they take a small cut of the proceeds.
I chose these platforms for different reasons. Blockfi is the most well funded of the CEFI platforms. It has raised $70mln from a range of blue-chip funds from Tiger Global to Fidelity. The company is widely considered to be “safe” (as safe as crypto can be). They have prudent risk management and are really trying to build one of the world’s largest asset management companies. Ledn has raised $34mln from Kingsway and Coinbase ventures.
How do you use them?
This is actually quite easy
Send money to your USD to your local crypto exchange and buy USDC (This is Coinbase’s USD token)
Send that money to one of the CEFI platform listed above and sit back and watch your interest roll in
Risks?
Everything carries risk. In my mind the two biggest risks here are (a) poor risk management from the CEFI platform - We have studied these platforms and understand they are very diversified so even if one of the protocols has something bad happen its unlikely that it will have any impact on customers (b) Some fraud or issue at Coinbase (as they run the USDC token). Coinbase is the largest crypto exchange in the world, worth over 54bln. They prove their tokens reserves as well if you are concerned about what they are doing with your money.